Although commercial mortgage lending has gained increased consideration as a revenue stream for residential mortgage brokers and loan officers, many struggle with the transition into this segment of the industry. A big part of the problem is the failure to understand how and why commercial appraisals and the associated process differs from the residential appraisal world. This lack of understanding is a formula for frustration, but equipped with some basic information, this frustration can be avoided.
With that said, let's review the four primary areas that commercial lending rookies get tripped up on:
With that said, let's review the four primary areas that commercial lending rookies get tripped up on:
- The cost of the commercial appraisal
- The delivery time for the finished report
- The appraisal process
- The appraiser selection process
The Appraisal Cost
In most parts of the country, a residential appraisal for a single-family residence will run approximately $350. Depending on multiple factors, a commercial appraisal can cost anywhere between $800 for a form-based appraisal to as much as $3,000+ for many small commercial properties. The range can increase if the property is larger, in a rural area, or more specialized in use. This can be quite a shock for originators unfamiliar with commercial appraisals.
The Delivery Time
The delivery time is the time from ordering the appraisal to receiving the finished product. A residential appraisal in the current market can be done in as little as a few days whereas a commercial report delivery time could be as long as a month or more. This seems like a very long time to a person with little or no commercial lending experience.
To get a better understanding of these first two areas of residential and commercial differentiation, let's look at the other characteristics connected with the process that gives justification to the cost and time it takes to complete a commercial appraisal. A significant factor that impacts the cost and timing is the number of qualified appraisers in a particular market. There is a relatively large supply of residential appraisers in most areas of the country. They are hungry for business and the competition is fierce. However, for commercial real estate, there is a much smaller pool of trained appraisal professionals. This supply and demand issue directly impacts both cost and timing. In rural areas, the cost tends to be even higher and the delivery takes longer than urban markets.
The Appraisal Process
Residential appraising has evolved over the years into a fairly rapid process; a process based on using technology to tap into an abundant pool of data that can be easily accessed online. The standardized report that is used has, as its core, a two-paged grid that makes the collection and analysis of information very straightforward.
On the other hand, because commercial property value determination can be changed by a multitude of factors - including multiple property classes, many potential uses of properties, varying market conditions, difficulty of locating comparable sales, and the extensive analysis that is required for each comparable sale - commercial appraisers have a much greater challenge in researching and analyzing data. Though some multi-family commercial appraisals are completed on a six-page grid-based form, most lenders require a narrative format for the majority of property types they consider. This necessitates going into extensive detail often with very limited available data. You can see how this extensive research and analysis can add to both the cost and delivery time associated with a commercial appraisal.
The Appraiser Selection Process
Due to the unique nature of each commercial appraisal and the paramount importance of the property in a commercial transaction, lenders insist on extremely high quality in the reports they receive from an appraiser. To ensure that quality, they perform a comprehensive review of every completed appraisal report. While residential appraisals are reviewed, they are not examined to the extent that a commercial appraisal is scrutinized. With residential deals, it is normal and customary for mortgage brokers to select and order the appraisal directly from the appraiser. On a commercial deal, this is the exception, not the rule. Due to the complexity of commercial real estate and the risk associated, most lenders insist on controlling the entire appraisal process. This increases the likelihood of using a competent appraiser who will give them a quality appraisal report.
It is important to understand that the appraisal is the most critical component of the commercial transaction. Lenders are not willing to allow anything this important to be out of their control. A final note regarding these issues - it is in everyone's best interest for you as the originator to discuss with your prospective clients the cost and delivery time in the early stages of the commercial transaction. These are issues that should not be introduced to them as surprises. By understanding the commercial appraisal process and communicating this information to your clients in a timely fashion, you will both improve your ability to better manage the commercial loan transaction and strengthen your client relationship.
In most parts of the country, a residential appraisal for a single-family residence will run approximately $350. Depending on multiple factors, a commercial appraisal can cost anywhere between $800 for a form-based appraisal to as much as $3,000+ for many small commercial properties. The range can increase if the property is larger, in a rural area, or more specialized in use. This can be quite a shock for originators unfamiliar with commercial appraisals.
The Delivery Time
The delivery time is the time from ordering the appraisal to receiving the finished product. A residential appraisal in the current market can be done in as little as a few days whereas a commercial report delivery time could be as long as a month or more. This seems like a very long time to a person with little or no commercial lending experience.
To get a better understanding of these first two areas of residential and commercial differentiation, let's look at the other characteristics connected with the process that gives justification to the cost and time it takes to complete a commercial appraisal. A significant factor that impacts the cost and timing is the number of qualified appraisers in a particular market. There is a relatively large supply of residential appraisers in most areas of the country. They are hungry for business and the competition is fierce. However, for commercial real estate, there is a much smaller pool of trained appraisal professionals. This supply and demand issue directly impacts both cost and timing. In rural areas, the cost tends to be even higher and the delivery takes longer than urban markets.
The Appraisal Process
Residential appraising has evolved over the years into a fairly rapid process; a process based on using technology to tap into an abundant pool of data that can be easily accessed online. The standardized report that is used has, as its core, a two-paged grid that makes the collection and analysis of information very straightforward.
On the other hand, because commercial property value determination can be changed by a multitude of factors - including multiple property classes, many potential uses of properties, varying market conditions, difficulty of locating comparable sales, and the extensive analysis that is required for each comparable sale - commercial appraisers have a much greater challenge in researching and analyzing data. Though some multi-family commercial appraisals are completed on a six-page grid-based form, most lenders require a narrative format for the majority of property types they consider. This necessitates going into extensive detail often with very limited available data. You can see how this extensive research and analysis can add to both the cost and delivery time associated with a commercial appraisal.
The Appraiser Selection Process
Due to the unique nature of each commercial appraisal and the paramount importance of the property in a commercial transaction, lenders insist on extremely high quality in the reports they receive from an appraiser. To ensure that quality, they perform a comprehensive review of every completed appraisal report. While residential appraisals are reviewed, they are not examined to the extent that a commercial appraisal is scrutinized. With residential deals, it is normal and customary for mortgage brokers to select and order the appraisal directly from the appraiser. On a commercial deal, this is the exception, not the rule. Due to the complexity of commercial real estate and the risk associated, most lenders insist on controlling the entire appraisal process. This increases the likelihood of using a competent appraiser who will give them a quality appraisal report.
It is important to understand that the appraisal is the most critical component of the commercial transaction. Lenders are not willing to allow anything this important to be out of their control. A final note regarding these issues - it is in everyone's best interest for you as the originator to discuss with your prospective clients the cost and delivery time in the early stages of the commercial transaction. These are issues that should not be introduced to them as surprises. By understanding the commercial appraisal process and communicating this information to your clients in a timely fashion, you will both improve your ability to better manage the commercial loan transaction and strengthen your client relationship.